Lean, Mean And State Owned Italian Companies

It's a lament heard all over the Continent. While private companies rise to the challenges of the global market, cutting costs and revamping strategy, state-owned dinosaurs remain mired in inefficiency and red ink. But there's one surprising exception: Italy. Thanks to a new generation of hard-driving executives who have carte blanche from Rome to get things done, Italy's Big Three public-sector companies--STET, ENI, and Enel--are slimming down and doing some of Europe's most innovative cross-border deals.

The impact on Italy's economy could be impressive. Last year, the trio of companies in telecommunications, electricity, and energy chalked up $78 billion in combined sales, accounting for substantially over 5% of Italy's gross domestic product, and posted a record $5.1 billion in net profits. This year, as the CEOs of the Big Three step up the pace of international dealmaking (table), results promise to be even better. "These mammoths are starting to move again, and I certainly welcome this new dynamism," says Stefano Micossi, director-general for industry at the European Commission in Brussels and a longtime critic of Italian state industry.

For the first time, the new chief executives at all three companies don't need political approval for their operational decisions--a dramatic break with past practice. Traditionally, coziness between the executive suite and Italy's political parties fostered not only inefficiency and inflated costs but also outright corruption. But that system collapsed with the massive "Clean Hands" anticorruption investigations that began in 1992.

Take CEO Franco Tato, 65, of electricity giant Enel. In early June, Tato jetted to Houston to ink an accord with Enron Corp. to form a jointly held private company that will take over around 10% of Enel's total electricity-generating capacity. The billion-dollar deal is aimed at increasing the value of assets that Enel would have to dispose of anyway later in the decade, when pressure to deregulate mounts from the European Commission. Such an aggressive deal would have been unthinkable under Enel's previous management. And Tato says more are on the way.

Just days before the Enron announcement, Tato had made headlines with a sudden move into telecommunications, forming a strategic alliance with Germany's huge Deutsche Telekom to field a joint bid in late June for Italy's third cellular-telephone license. If they win, says Tato, the two companies then plan to stage a $5 billion assault on Italy's monopolistic fixed-line telephony market.

REVOLUTIONARY. The Enel job is Tato's first in the public sector. A former top executive at Olivetti, he spent most of the 1980s running companies in Germany, then joined the sprawling Fininvest media group controlled by tycoon-turned-politician Silvio Berlusconi. Now, Tato has brought his independent style to Enel, which is still 100% government-owned. Within five months of taking over in June, 1996, he launched a remake of the $21 billion group, turning it from a centralized structure into six radically leaner units, each with its own balance sheet. He also brought in 15 top managers from private industry to help with the restructuring--a revolutionary move in a group that had hired only two outside executives over the previous 30 years.

It's a similar story at ENI, the energy conglomerate that once served as a virtual slush fund for Italy's political parties. In early 1993, just as cleanup fever was sweeping Italy, police arrested not only the heads of ENI's three largest operating companies on corruption charges but also Chairman Gabriele Caglieri, who committed suicide later that year in Milan's grim San Vittorio prison.

TALENTED. It was an inauspicious beginning for ENI's new CEO, Franco Bernabe, a bright economist who had been with the group since 1983. But Bernabe sold off dozens of noncore businesses, refocusing the company on high-margin oil and gas operations. By the end of 1996, he had raised $5 billion from asset sales and slimmed down the workforce by 25,000 while eliminating more than 200 operations. ENI was on such a profit roll that the Italian Treasury's 1995 sell-off of a 15% stake had to be increased by another 15% nine months later because of demand from institutional investors.

Now, Bernabe, 48, is kicking off a road show in Europe and the U.S. to raise $5.8 billion in a sell-off of a further 12% to 15% of ENI stock beginning on June 27--the largest single share issue anywhere in the world so far this year. Says Daniel Yergin, president of Cambridge Energy Research Associates Inc.: "Bernabe is one of the most talented people in the global energy business today. He has changed ENI from being a tool of the Italian state to a major international player."

Chances are high that telecom giant STET could also make a stock market splash when the Italian government sells off its remaining 44.7% stake next November. When 50-year-old Tomaso Tommasi di Vignano took over as CEO in January, he put 250 top executives out to pasture with early retirement. Tommasi is also reorganizing STET, including a planned merger next month with its main operating company, Telecom Italia.

At the same time, STET, which already controls Europe's largest cellular-telephone operator, is stepping up its international activities. In early June, Tommasi bought into Austria's leading cellular operator, then ponied up $540 million to take a 29% stake in Telekom Serbia. And on June 10, STET outbid rival France Telecom for a minority stake in Spain's Retevisin, a public company that has the license to become Spain's second fixed-line telephone company.

The newfound independence from the government for Tommasi, Tato, and Bernabe is no accident. Most political leaders realize that they have to keep their hands off large state-owned companies if Italy ever hopes to join France and Germany in building Europe's monetary future. And in the new climate, the country's political parties no longer count for much when it comes to corporate decision-making. "I don't answer to the parties," boasts Tato. "I only answer to my shareholder, the Treasury."

Of course, true accountability at Italy's Big Three will come only when they are fully privatized. Now, for the first time, that goal looks attainable, despite opposition from the far left and far right. STET should be a fully public company by yearend, and one more sale of ENI shares could reduce the government's stake to 51%. And Enel may be sold off in 1998, according to Treasury sources. "As usual, resistance to change is louder in Italy than in other countries," notes Tato. "But in the end, change comes more quickly and is more profound." Indeed, the rest of Europe's state-owned companies could learn from Italy's example.

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